A Resource Superpower On the Verge of Total Failure

I had a notable conversation a few months back with a friend regarding doing business in India.

He remarked that unlike many places in the world, corruption and bureaucracy here have gotten worse. To the point where even local businesspeople are shunning new ventures in the country.

A couple of items yesterday suggest these problems may be coming a head. Suggesting some profound changes coming for the natural resources world.

First, in iron ore.

Reports emerged in local papers that a spiralling scandal may be threatening to derail the prolific iron industry in the southwestern Indian state of Karnataka.

The federal government is reportedly investigating illegal and unreported mining of iron ore here that took place between 2006 and 2010. This “loot” of natural resources is reported to have involved over 100 million tonnes of iron. Which was simply dug up and shipped from local ports, without license or royalties paid.

The investigation has already sent 26 people to jail, including 4 MLAs and a former minister. Reports are that hundreds of other exporters could join them as the scandal unfolds.

This development won’t help efforts underway to restart hobbled iron ore production in Karnataka. And such systemic issues appear to also be presenting in other areas of the Indian resource business. Like natural gas.

On the same day as the iron ore story broke, reports surfaced that major resource player BHP Billiton is walking away from nine oil and gas blocks in India. Representing a relinquishment of most of the company’s interest in the country.

BHP gave no official reason for its departure. But local media reported that the firm is dismayed at permitting delays that have made it nearly impossible to work its concessions here.

Some high-profile players in the local energy industry see this as a tipping point. “This is a sad story for India’s E&P sector. Sentiments are already negative and exit of BHP Billiton is going to do more harm,” noted R.S. Sharma, former chairman of state-run Oil and Natural Gas Corp.

All of this suggests that the Indian natural resource sector is in crisis. Systemic political problems are simply making metals and energy production here non-functional.

This has ramifications for producers and consumers globally. If Indian producers are unable to grow local supplies of iron, natural gas and other commodities, it’s going to mean fewer exports. And potentially surging imports to meet domestic demand.

That could change the worldwide balance in numerous markets. Nearly everyone should therefore be keeping an eye on what happens next in India.